Stable Chinese steel demand to support iron ore in 2019

China's steel demand is expected to remain stable this year, which is likely to help support iron ore demand, industry executives said at the Corex steel conference in Sichuan province.

"I am moderately optimistic about steel demand in 2019, although there may be episodes of sentiment-driven, large fluctuations during the year," Wu Jingjing, deputy director for marketing at the China iron and steel association (Cisa), said the conference organised by spot trading platform Corex. "Supply of steel likely peaked in 2018, driven by high profits. This year demand and supply will not see much change from last year's levels."

Continued mill profitability in 2019 will support prices of medium and high-grade ores, said Wu.

Government stimulus is expected to support steel demand, with a price rally likely after markets reopen following the lunar new year holidays on 11 February, said Li Peng, director of Fujian Sangang Steel, adding that overall demand may remain stable.

Beijing has reduced mandatory cash holdings for banks, launched large rail transport projects and hinted at tax cuts and more funds for infrastructure this year.

Steel profits are stable at around 400-500 yuan/t ($59-74/t) for south China-based mills and around Yn300-400/t for mills in Hebei, said Li. The lower profit margins are likely to weigh on demand for higher-priced direct-charge iron ore such as imported pellet and lump in the near term.

But there is not much room for a further narrowing in the differential between high-grade and low-grade ores, which has been contracting since November, Li said. He is bullish on 65pc IOCJ fines because of the ore's value in the furnace burden.

Iron ore use has undergone a structural shift away from low-grade ores over the past year, as mills build large blast furnaces in coastal areas and emissions standards are tightened. But a slump in mill profits since November has sharply increased purchases of low-grade ores such as Australian producer Fortescue Metals' SSF fines, as mills seek to keep costs in check. SSF fines prices may not have much further upside, said Li.

Fortescue's group manager for business development Zhuang Bijun is optimistic that strong demand for low-grade ores will continue, as mills reduce costs and increase efficiency.